Two-thirds of loans given to small and medium enterprises are used in trading, which analysts say is a threat to sustainable economic growth.

Nearly Tk 25,000 crore or 65 percent of SME loans disbursed in January-September of 2011 went into trading, 29 percent into manufacturing and the rest into the services sector, according to data from Bangladesh Bank.

“The SMEs are meant for production. If the loans are not used for manufacturing, the core objective will not be achieved,” said Mustafa K Mujeri, director general of Bangladesh Institute of Development Studies.

Mujeri, a former chief economist of Bangladesh Bank, said the central bank should identify the causes and remedies, so that SMEs can flourish.

Bankers and SME businessmen blamed the rise in cost of funds, low productivity, and a lack of skilled manpower and policy support from the government for the situation.

Regulatory permissions, such as environmental clearance for a manufacturing unit, also discourage entrepreneurs.
“The rising interest rate is pushing production costs up,” said Dewan Ali Kabir, who manufactures printing paper used to print utility bills.

Kabir borrowed money initially at 12.5 percent. Months later, the bank reset it at 14 percent and now, they are asking for 18 percent, he said.

That is not the only bad news for Kabir. As he imports raw materials, the devaluation of the taka is eating up his profits.

Nessar Maksud Khan, who runs a group of small and medium companies, said the high costs of production are discouraging SMEs from manufacturing.

“I used to outsource plastic products from the local market for corporate supplies. Later, I found it cheaper to import,” said Khan, also a director of Dhaka Chamber of Commerce and Industry.

Though business becomes easier for a bank if it funds trading activities, the country is missing out on the much needed transformation to manufacturing and industrialisation. SMEs contribute significantly towards industrial output, exports and employment generation for the economic growth of any country.

“Repayment of the manufacturing sector is not very good. Moreover, it is exposed to a lot of external factors, such as a supply of energy, import of raw materials and the exchange rate,” said a senior manager of BRAC Bank.

For bankers, he said, trading is easy to understand and less risky to finance.
“Banks play a helping role for traders, but they must be drivers for the manufacturing concerns,” said the BRAC Bank official.

An Eastern Bank official concerned with the SME division pointed at vested quarters, who import goods by dodging taxes, as a threat to the local SME manufacturers. He also said regulatory requirements, such as getting permission from the environment department for any manufacturing enterprise, are time consuming.

“It takes at least six months to get the required permission from the department of environment, which discourages both borrowers and lenders,” the official said.

Bankers found SMEs weak in managing business -- from planning to purchasing, design, production, quality control, marketing, finance, human resources, public relations, new business developments and target growth.

Due to their small size, SMEs cannot afford to appoint qualified fulltime financial executives to manage their activities, and interact with the bankers and regulatory agencies, they said.

The Daily Star/Bangladesh/ 15th Jan 2012